The Dow Jones Industrial Average fell 199 points, or 1.6%, to 12,303, the S&P 500 slid 27.1 points, or 2%, to 1,305 and the Nasdaq Composite dipped 75.2 points, or 2.7%, to 2,765. The FOX 50 fell 15.7 points to 930.

The Nasdaq took its biggest one day fall since February, and both the Dow and S&P 500 dropped the most since the beginning of June. In a sign of the turbulent selling on the day, the VIX, a gauge of volatility, spiked 14%.

Economic growth in the U.S. moderated in June and early July, according to the Federal Reserve's Beige Book, which reviews anecdotal evidence across the central bank's 12 districts. The Fed also said conditions in the labor market "remained soft" across much of the country.

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Also on the economic front, orders for long-lasting goods slid 2.1% in June, worse than the 0.3% gain economists had expected. Excluding the transportation component, orders were up 0.1%, and excluding defense they were down 1.8%.

New orders for goods factors into broader economic growth. A report on second-quarter economic output, on tap for Friday, is expected to show the economy expanded at an annualized pace of 1.8%.

House Speaker John Boehner's plan to raise the debt ceiling and cut the deficit by $1.2 trillion over the next decade fell through overnight after the Congressional Budget Office scored the bill, finding it would only reduce the deficit by $850 billion. This means that voting on the measure in the House is likely to be delayed until Thursday, analysts say, and its passage in either chamber remained questionable.

A deal proposed by Senate Democratic Leader Harry Reid would provide deeper cuts, the CBO found, but it faces strong opposition in the Republican-controlled House.

'Flight From Risk'

The U.S. risks having its debt downgraded, or worse, defaulting if lawmakers are unable to come to an agreement on raising the debt ceiling and also crafting a credible deficit-reduction plan. Indeed, the price to insure American debt, as reflected on the market for credit default swaps, lurched to an all-time on Wednesday.

Global credit markets, economists say, are likely to take a substantial hit if U.S. debt is downgraded, potentially weakening an already fragile global economic recovery.

The risks posed by a downgrade are "quite serious," wrote Rick Rieder, head of fixed income strategy at BlackRock. Rieder notes that a wide range of financial assets are directly tied to U.S. debt, meaning an increase in Treasury rates could spark much broader rate increases.

Additionally, largely every major financial valuation model is built on the basis of American bonds as a so-called "risk-free asset;" if this ceases to be the case, Rieder says, it becomes more difficult to adequately gauge the risk of other assets.

"All the arrows are pointing lower," said Peter Kenny, managing director at Knight Capital Group, referring to weak economic data and stalled debt talks. According to Kenny, traders are making a "flight from risk" amid the uncertain economic and political picture.

Indeed, gold has hit record highs six times in the last two weeks. Gold fell $2.00, or 0.12%, to $1,617 a troy ounce on Wednesday. Silver slipped 13 cents, or 0.32%, to $40.57 a troy ounce.

The U.S. dollar jumped 0.82% against a basket of world currencies, while the euro slumped 1.1% against the greenback.

Selling pressure was so fierce that 90% of the days NYSE composite volume was in declining shares. Of course, the last time that happened on July 18, the market rallied 3% over the following four days.

Industrials like Caterpillar (CAT) and technology companies like Cisco (CSCO) sustained the steepest losses after a disappointing durable goods orders report. The Dow's losses were tempered by aerospace giant Boeing, which got a boost from a strong earnings report.

The world's largest aerospace and defense company said earned it earned $941 million, or $1.25 a share, on revenue of $16.5 billion. The bottom line topped analysts' expectations of 97 cents a share, while sales came in line with estimates.

Energy markets were lower on the day following a bearish inventory report from the Energy Department and weak economic data. Stocks of oil were up 2.3 million barrels, compared with a forecast of a 1.7 million barrel draw. Gasoline inventories climbed by 1 million barrels, compared with estimates of a smaller 400,000 barrel build.

Prices at the pump ticked higher by a penny overnight. A gallon of regular costs $3.70 on average nationwide, up from $3.57 last month, and well higher than the $2.74 drivers paid last year, according to the AAA Fuel Gauge report.

Corporate News

Dunkin' Brands (DNKN), the owner of Dunkin' Donuts and Baskin-Robbins, jumped close to 50% on its first day of trading on the Nasdaq.

ConocoPhillips' profits of $2.41 a share whizzed by the Street's view of $2.19 a share.

Delta Air Lines (DAL) posted adjusted second-quarter earnings of 43 cents a share, missing estimates by a penny, as fuel costs surged 36% during the quarter.